Stock Market Ripples and Trading Tactics

Jesse Livermore concluded, through trial and error, that the biggest profits are made through being fully invested while markets are trending strongly.

Others have learned to profit from trendless markets – trading ripples in the market.

In Staying Ahead of the Curve, George Soros describes how Victor Niederhoffer had a system for trading these ripples and how, eventually, it failed.

“He was well grounded in random walk theory. He looked at markets as a casino where people act as gamblers and where their behavior can be understood by studying gamblers. For instance, gamblers behave differently on Mondays than on Fridays, differently in the morning than in the afternoon, and so on. He regularly made small amounts of money trading on that theory. I gave him money to manage and he made a good return on it.

“There was a flaw in his theory however. It is valid only in a trendless market. If there is a historical trend, a tide, it can overwhelm these little waves that are caused by gambling behavior and he can be very seriously hurt because he doesn’t have a proper fail-safe mechanism.

“He made very good money while the markets were sloshing around aimlessly. Then he started losing money, and he had the integrity to close out the account. We came out ahead. Very few commodity traders would have done that.”

Get Your Trading Strategy Right

Some traders trade a single market (or just two or three) – changing their tactics depending on whether the market is trending, trendless, or showing a reliable chart pattern.

Others trade a single tactic – such as only trading head and shoulders chart patterns – and scan the markets for indices, stocks and commodities, in search of these opportunites.

Still others take a more à la carte approach, mixing and matching tactics and markets wherever they think they can make a profit.

In his earliest years, Jesse Livermore day traded successfully using price/volume correlations.

Later he acted on – and then ruled out – using tips and inside information.

Finally, he used macroeconomic data as a guide where the market ought to be moving and then looked for pivotal-point trades in stocks and markets which had begun to trend.